Thursday, January 22, 2009

TRADING DOWN?

Many people think the news media are biased. In some cases, I’m sure that’s so. Far more widespread is the problem of unexamined assumptions and beliefs, a mindset maintained over time in the face of obvious changes in circumstances. It’s not so much a question of misreporting as of misunderstanding the reality about which the report is made.

Take the recent reporting on the decline in international trade over the past year. A number of stories have presented this as an alarming development and frequently included a gratuitous warning about “growing protectionism.” The Wall Street Journal, for example, ran a story under the headline “Global Trade Posts Sharp Decline.” Comparing different periods in each case, the article reported declines in imports and exports of 27 percent for Japan, 18 percent for the US, and 11.9 percent even for China. The reporter asserted that a decline in trade was an “unusual development even in a recession.”

For starters, that’s a dubious assertion. When as normally happens in a recession a society consumes less, it needs fewer goods -- whether produced at home or abroad. As recessions are corrections for periods of excess consumption, such a decline is not necessarily a bad thing. Painful, yes, for employers and employees. Uncomfortable, yes, for elected officials. But reduced demand can be a normal part of a healthy process of adjustment.

Next, consider what constitutes a “sharp” drop. Compared to the swift and brutal collapse of steel, aluminum and auto production worldwide – just to cite a few industries -- what’s so extraordinary about a 12, 18 or 27 percent drop in overall trade?

Moreover, those numbers obscure some good news. One reason why trade measured in dollars has fallen is that petroleum prices have plummeted from their heights. Remember $140 going on $300 per barrel prices? Does the Journal really want us to consider that an alarming development? Personally, I’m thankful with every tank full of gasoline.

But the basic problem runs deeper. The unstated assumption of the self-proclaimed “pro-trade” camp is that trade, any trade, is per se a good thing and that more trade is always better than less. Cheerleaders for the current globalization model have for years taken pride in the fact that the growth in international trade has outpaced global GDP growth for several decades. Trade must lead growth, you see? Without faster trade growth, the global economic pie couldn’t possibly grow fast enough to satisfy rising expectations, right?

What’s wrong with this view? Two points bear emphasizing:

A major function of international trade is to smooth out imbalances in national economies. When a country needs more than it can produce in a given period, it imports. When it produces a surplus, it naturally tries to sell the excess goods into world markets. Thus, it’s perfectly normal, acceptable and even welcome when trade helps to smooth out excesses and deficiencies in national economic performance. To succeed, export led growth depends on growing consumer markets abroad. When Sweden or Singapore follows that path, the world market can easily absorb their net exports. When a giant economy such as China pursues this path, however, the strategy will encounter natural limits. As the US case shows, chronic massive trade deficits – the other side of the same coin – are unsustainable. When that point is reached, massive export-led growth becomes unsustainable, too. And when export-led growth strategies come acropper, it’s a correction, not a tragedy.

So, let’s acknowledge the recent drop in international trade for what it is. First, a sign of the fundamental ill health of the world economy, both in the real and financial sectors. Second, the beginning of a long-overdue adjustment to excessive reliance on export-led growth, especially by larger Asian economies. Third, a warning that surplus as well as deficit countries need to get their macroeconomic policies right if either is to prosper over the long run.

Open trade on fair terms is a good thing. It spurs competition and efficiency, expands consumer choice, and keeps prices moderate. It can help poorer countries grow and develop. But, as we commented recently on China’s massive stash of foreign exchange, it’s always possible to have “too much of a good thing.” All those who write, read and think about international trade should take care, especially in these perilous times, to understand the fundamental realities of the present trading system and leave the ghost of 1929 on the scrapheap of history.